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Several disappointed people contacted me today. They expected to receive their economic stimulus payment deposited into their bank account today but they have not seen the deposit posted online yet. According to the payment schedule, individuals whose Social Security numbers end with two digits between 00 and 20 and who have direct deposit banking information on file with the IRS should have received their deposit by today.

If you’re looking for your money, check the schedule first to ensure you’re not jumping the gun. Keep in mind that this schedule is only “accurate” for those who filed their taxes by the usual deadline.

After you’ve verified that the government expected you to receive your payment already, you can fill in a form online to ask the IRS about the status of your payment. This form will apparently only work for those who filed their tax returns over 6 weeks ago, so it sounds like the government may be late with some payments depending on when you filed.

Don’t confuse the “where’s my stimulus payment?” form with the “where’s my refund?” form.

Important clarification! It’s important to consider that if you filed your taxes through a third party like H&R Block or Turbotax, you may have opted for an accelerated refund in the form of a refund anticipation check, refund anticipation loan, or similar product. If you received an accelerated refund, you will receive your stimulus rebate (if you qualify) via paper check, not direct deposit. Also, if your tax preparer deducted any fees from your tax refund, your stimulus payment will arrive via paper check, not direct deposit. Furthermore, if you filed through a third party and owed taxes, the IRS will not have your direct deposit information, so if you qualify for a stimulus payment you will receive it via paper check.

This week, the Internal Revenue Service of the United States will begin sending direct deposits to those who qualify for the economic stimulus tax payment and checks soon after. Everyone who is interested in the tax ramifications of this payment should now know that the money received as a result will not be counted as “income” for federal tax purposes and that the payment is an advance of a new credit introduced for 2008’s income tax calculations.

The way I see it, the question in the minds of many is more immediate: What should we do with our stimulus payment? This deposit of $300, $600, or more is in some ways an unexpected gift. Though some could rightly argue that it is simply more of our own money returned to us, it is unexpected and thus not planned for. Some could also argue that it is wealth redistribution, as some low-income taxpayers may receive a payment larger than their total tax liability for 2007. (Note that the government changed their terminology for this program in March from “rebate” to “payment.”)

Regardless of opinions, here are some of the more popular options for dealing with an unexpected sum, either from the government or from any source.

If you have high-interest credit card debt, consider using your found money to reduce your interest payments. Credit card debt is an unnecessary expense. Unless you have an introductory rate or a special deal, chances are that you cannot earn a higher rate of return in an investment, particularly a liquid investment, than what you are paying in interest. Reduce your total debt and your interest payments by applying the total amount of your stimulus payment towards the balance on your credit card with the highest interest rate.

If you’re taking on the debt avalanche (a method mathematically superior to the snowball method), your payment will go far towards reducing your total debt.

If you have a mortgage on your primary home, consider making an extra payment to your principal this month. While it’s unlikely to make a noticeable dent in the short term, even one extra payment will reduce your total spent on mortgage interest significantly over the next few decades. To illustrate, a $500,000 loan over 30 years, starting June 1, 2008, with an interest rate of 7%, will benefit from a $8,400 reduction in total interest paid over the life of the loan if an extra payment of $1,200 is processed on June 1.

If you have no immediate savings, consider depositing the payment in a high-yield savings account. This is an important step to building a tiered emergency plan. While this money may not earn as much return over time as an investment in the stock market might, having funds available in a semi-liquid account allows you not to dip into debt as quickly or sell investments incurring fees and tax consequences.

You can count on an emergency arising at some point, and it’s advisable to be prepared.

If you are debt-free and you have an emergency fund, consider devoting this money to retirement. Saving for the future will increase the possibility of having the ability to stop trading your time and effort for money. In other words, if you’d like to retire from working someday, you’re going to need money to sustain your ability to pay for your expenses. Money invested in the stock market now has a good chance of earning a good rate of return when your time horizon for needing the income is several decades away.

I suggest opening a Roth IRA with Vanguard, invested in VTSMX, the Vanguard Total Stock Market Index Fund. (And no, they don’t pay me for this recommendation.) The fund has a low fee and a low barrier to entry for Roth IRAs.

If you have a Roth IRA, you can invest this money in your 401(k). This option isn’t as straightforward as sending a check to your 401(k) custodian, though. You can’t just deposit money into your 401(k) as you would be able to with another investment account. You’ll have to temporarily increase your 401(k) deferment by the amount of your stimulus payment and then reduce your deferment afterward. Assuming you’re not already maximizing your 401(k) contributions, this is a roundabout method of investing your found money in an tax-deferred account.

If you are set for retirement, consider saving this money for your children or other relatives to help pay for higher education. I haven’t decided whether I am a fan of 529 accounts which only offer tax-free earnings when funds are withdrawn for educational expenses (and in some cases, the rules are strict about which schools’ expenses will qualify), but helping to pay for education—so your children don’t have to work as much during the time they should be concentrating on learning—will be beneficial for their future earning potential.

And if you plan on growing old, your children’s future earning potential may be quite relevant. They may have to help support your health in your later years.

If you have no saving or investing holes to be filled, consider charitable giving. While $300 may not be much to you, there are many organizations who would be happy to receive the money to help fund a program. This is a highly personal decision, so you should find an organization that has personal meaning.

Religious organizations and churches are popular choices, and some people prefer to support scholarships pertaining to a meaningful field of study. Organizations that support social, arts, and athletic programs constantly require funding. If a health condition has affected your family or friends, chances are there is a related organization supporting research towards treatment and a cure.

All out of ideas? Buy something, either for someone else or for yourself. MyMoneyBlog has some tips on where your money will go the farthest, with several stores offering a 10% bonus on your money when purchasing a gift card or a pre-paid credit card. Watch out for these types of benefits. Often, and where not prohibited by law (ie., California), gift cards lose value over time or charge a fee, reducing your bonus (if any). Some of the stores offering a 10% bonus include Kroger Supermarkets, K-Mart, Sears, and Radio Shack.

In some cases, you have to bring your actual stimulus check to the store to receive the bonus. For those of us who are efficient and will receive their payment via direct deposit, we would not qualify.

The stated purpose of this economic stimulus plan, as devised by both the White House and the Congress, is to stimulate the economy by getting money into the hands of who might spend it, particularly on American-made products. The political purpose is deeper yet more superficial: to ensure that both the Democrats and the Republicans appear to care about the economy as the presidential election draws nearer.

The economy is often a matter of psychology rather than pure financial statistics, so it’s unclear whether these payments will have any measurable effect on the economy. If economic sentiment changes from negative to positive, it’s unlikely that one could prove that the stimulus package would be the cause.

How do you plan to invest or spend your stimulus payment?

If you were given the responsibility of changing laws, and the government and people of the United States had no choice but to uphold your laws (other than being thrown in jail), how would you reform the tax code?

Do you think that either the “flat tax” or the “fair tax” would be appropriate for the country? Is a consumption tax the best path? Should the tax system be regressive? What about wealth redistribution through taxation? Do different economic times call for modifications to the tax code or does one tax code fit all economic situations?

If you think that the tax system in the United States is perfect the way it, then please feel free to say so in the comments below.

Also, my recent article about the frugal lifestyle was selected as an “Editor’s Pick” in the latest Festival of Frugality, hosted at Rather Be Shopping.

Please share your thoughts: How would you reform the tax code?

I spent a few hours yesterday completing my tax return. Although I had wanted to work with a tax professional, my procrastination interfered with the plan. It wasn’t as complicated as I expected, but there may have been some deductions I missed. I owe a few thousand dollars, which was less than I originally anticipated but more than I wanted to the federal and state governments in total.

Once again, I chose TaxAct to calculate and electronically file my federal and state tax returns.

When I finally meet with a tax account this year, I will arrange for a review of the returns from the past few years.

SEP IRA contribution completed

While completing the tax return, I was able to determine how much I could contribute to a SEP-IRA for 2007, so I initiated transfers of $4,350 into Vanguard’s Total Stock Market Index Fund (VTSMX) and about $8,480 into Prime Money Market Fund (VMMXX) to represent the employer contributions.

I intend on creating an automatic periodic transfer from the money market into the stock index.

The initial contributions as well as the tax payments will be deducted directly from my ING Direct account this week.

Economic stimulus payment

According to the Economic stimulus payment calculator, if I entered my information correctly I can expect a $600 payment this summer.

It will be disappointing to see my net worth drop this month due to my tax payment. I’ve increased my estimated payments for 2008 to attempt prevent a large payment next April.

Over the weekend, I received a notification from the IRS about the economic stimulus. The notice isn’t personalized; it contains only general information about the new law. The text of the letter is straightforward. Rather than get into the details, particularly the facts that the law authorizes a new credit to 2008 income taxes and that the “payment” referred to in the letter is a pre-payment of that credit, estimated based on 2007 income taxes.

The notification is a waste of money. Here is the final paragraph:

All individuals receiving payments will receive a notice and additional information shortly before the payment is made. In the meantime, for additional information, please visit the IRS website at www.irs.gov.

(Interestingly, the web address is underlined as if it were a hyperlink, but as this letter appears on paper. “Clicking” on the link will get you nowhere.)

If the IRS is sending out a second notification right before the payments are sent, I would say that this pre-notification notification is pointless. The opposite side of the letter contains some instructions for calculating this tax credit. Unfortunately, the instructions are far too simplistic to provide an accurate answer for most people. Even the calculator on the IRS website provides only an estimate. I’d have to say that the only calculator that follows the letter of the law is the one posted on Consumerism Commentary and provided by a reader. Of course, since the IRS is calculating the final credit amount on their own, and they probably won’t be using the calculator found here, we can’t guarantee that what you receive will be the same as the result from our calculator.

Here’s a schedule showing when the IRS will send payments to individuals, via check or direct deposit.

The IRS has posted a schedule indicating when tax payers, if eligible, will receive their tax payments. Keep in mind that these are estimates and the IRS could very well not meet this schedule. The schedule is based on the final two digits of your Social Security number. If you file jointly, use the last two digits of the primary filer’s Social Security number.

If the IRS has your banking information on file, as they would if you entered the information on your 2007 tax return in anticipation of a refund via direct deposit, these are the dates by which you will (most likely) receive your refund.

00 through 20: May 2
21 through 75: May 9
76 through 99: May 16

If the IRS does not have your direct deposit information on file, then you can expect a check to arrive based on this schedule (approximately).

00 through 09: May 16
10 through 18: May 23
19 through 25: May 30
26 through 38: June 6
39 through 51: June 13
52 through 63: June 20
64 through 75: June 27
76 through 87: July 4
88 through 99: July 11

More information on the economic stimulus tax rebate at Consumerism Commentary:

• Economic Stimulus Tax Rebate Calculator (final version)
• How Will the Economic Stimulus Tax Rebate Affect 2008 Tax Returns?

Here are links to official IRS information regarding the new tax credit:

• IRS Announces Economic Stimulus Payment Schedules
• Economic Stimulus Payment Calculator (official version, but still an estimate)
• Economic Stimulus Payments Information Center

It’s possible that this advice might be considered common knowledge, but I just learned it at age 32, so feel free to forward it to your friends who recently became part of a working couple.

The first time I saw a W-4 form at age 16, I had to take it home and ask my parents to help me with it, because the design of the thing was so oppressively boring that I could barely read it, not to mention that I had no idea what a “dependent” was. I remember my father walking over and saying, “just put zero.” Not that he was wrong, but, you know, teach a man to fish, and all that…

In the last 16 years, the design of the W-4 hasn’t improved. It’s not unique among Government documents for lacking proper hierarchy. For example, see this article about how better information design might have helped President Bush pay more attention to the memo titled “Bin Laden Determined to Strike in US”.

Here’s a snapshot of the current W-4, with an arrow pointing at the part that looks important:

And, once you’re married, here’s where the important part starts:

Of course, blaming others is hardly ever a good way to retroactively avoid making mistakes. And my mistake was not closely re-reading the W-4 after I was married. Had I ever spoken with an accountant or financial adviser before I was married, I might have avoided this mistake, but taxes had always been so easy. All marriage was supposed to do was maybe provide a tax break or two.

In 2007 I answered the W-4 questions honestly, as I had done ever since I started working full-time (enter 1 for yourself, enter 1 if you are married, and I ended up with a “2”), and my wife entered a total of “1”, because she’s just more conservative than me. All year long we, as a working couple, were not having enough taxes withheld. Not that we were living like kings, and we just didn’t notice it… we weren’t awash in cash. It just felt like we were doing okay for ourselves.

As it turns out, we bought stuff, and went out to dinner, more often than we should have.

The summary version is this: if you are filing jointly, and both of you have an income, only one of you is supposed to answer the W-4 questions “honestly”. More specifically, there’s a formula you can use to determine the individual settings that both of you should be putting on your W-4. Other important factors, like a mortgage payment, will also come into play when determining these settings.

Theoretically, there is a withholding calculator operated by the IRS, but every time I go to look at it, it’s “undergoing maintenance.”

There are other options out there, but it’s hard to gauge the official-ness of calculators created by companies that don’t have as much information as the IRS does.

If you’re part of a working couple, your W-4 almost certainly needs some finessing. Comment below if you have additional advice or questions for me and the rest of the readers here.

“The check is almost in the mail.” Shortly, the IRS will send letters to everyone who filed a tax return for 2006 to let them know about the economic stimulus rebate checks. The actual checks won’t be in the mail until at least May. On one hand, it’s good to get information into the hands of people across the country who have been living under a rock, but it comes at a great expense—an expense of $42 million.

The letter will also explain how the tax rebates “work,” but I have no doubt the text in the letter will raise more questions than it will answer. Still not sure how much of a rebate you will receive due to this new stimulus package? You can calculate your refund here. This calculator has been viewed by over 240,000 people.

Let’s get away from taxes for a little bit and look at a few articles posted elsewhere: Read the rest of this article »